DOCSLIB.ORG

Karl Brunner and Allan Meltzer

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Karl Brunner and Allan Meltzer Karl Brunner and Allan Meltzer: From Monetary Policy to Monetary History to Monetary Rules* Prepared for the Conference “Karl Brunner and Monetarism” Swiss National Bank, Zurich, Switzerland, October 29-30, 2018 Michael D Bordo Rutgers University, Hoover Institution, and NBER Economics Working Paper 19104 HOOVER INSTITUTION 434 GALVEZ MALL STANFORD UNIVERSITY STANFORD, CA 94305-6010 March 1, 2019 Karl Brunner and Allan Meltzer were pioneer monetarists whose work in the 1960s and 1970s challenged the prevailing Keynesian orthodoxy. A major part of their work was a critique of the Federal Reserve System’s monetary policy strategy from the 50s leading to the Great inflation. This paper explores the nexus between Brunner and Meltzer’s earlier work in a report prepared for the US congress in 1964 on the System’s discretionary counter cyclical policy in its first fifty years of existence, and Allan Meltzer’s monumental two volume A History of the Federal Reserve (2003, 2009). Many of the themes in the early report reappeared in A History. A key theme in the 1964 monograph was a critique of the Fed’s use of the Net Free Reserves doctrine which had evolved in the 1950s from the earlier Burgess Rieffler Strong doctrine which guided Fed policy in the 1920s and 1930s. which the authors argued explained the Fed’s policy mistakes leading to the Great Contraction. They posit the case that their monetarist approach based on the money supply, monetary base and money multiplier could have greatly improved the Fed’s performance from the 1920s to the 1960s.The 1964 monograph was a key building block for their later work in monetary theory and policy including their critique of Keynes, the importance of policy uncertainty and the case for a monetary base rule. Keywords: Federal Reserve, Net Free Reserves Doctrine, Monetary Rules, Allan Meltzer, Karl Brunner, Monetary Policy JEL Codes: E52, E58, N12 The Hoover Institution Economics Working Paper Series allows authors to distribute research for discussion and comment among other researchers. Working papers reflect the views of the author and not the views of the Hoover Institution. * For helpful comments I thank Alan Blinder, Ben Friedman, Hugh Rockoff and David Wheelock. 1. Introduction Karl Brunner and Allan Meltzer were pioneer monetarists along with Milton Friedman, Anna Schwartz and Clark Warburton1. Their path breaking work in the 1960s and 1970s on the relationship between the money supply and output and prices based on the Quantity Theory of Money challenged the prevailing Keynesian orthodoxy. They also effectively criticized the monetary policy strategy of the Federal Reserve System and contributed to the sea change in policy making that occurred under the chairmanship of Paul Volcker in 1979. Their work encompassed monetary theory, monetary policy and monetary history. In this paper I explore the nexus between their earlier work in a report prepared in 1964 for the U.S. Congress evaluating the Federal Reserve’s discretionary countercyclical monetary policy strategy in its first 50 years, and Allan Meltzer’s later 2003 and 2010 monumental two volume book A History of the Federal Reserve and finally to their case for monetary rules. Many of the key themes in the later Meltzer books were developed earlier by Brunner and Meltzer in their 300 page monograph. These included: the role of the Federal Reserve’s incorrect monetary framework in precipitating major failures in monetary policy, especially the Great Contraction from 1929 to 1933 (and later after the monograph was published, the Great Inflation from 1965 to 1983). Brunner and Meltzer blamed the Fed for following the flawed Free Reserves Doctrine which in turn was based on the earlier Burgess Rieffler (Strong) doctrine developed in the 1920s2. Brunner and Meltzer (1964) argue that a superior framework based on the monetary base, money supply multiplier and the money supply would have avoided many of these mistakes. To make their case against the Fed’s framework the monograph is full of discussions 2 of episodes of Federal Reserve Policy from the 1920s to the 1960s. These episodes appear later in Meltzer’s History of the Federal Reserve. In the 1964 monograph they do not explicitly make the case for a monetary rule as their mandate was to critically evaluate the Fed’s discretionary counter cyclical policies. In their later work they make the case for monetary rules based on the Fed’s flawed use of forecasts in conducting discretionary monetary policy. This line of research led to Allan Meltzer’s 1987 monetary base rule with feedback from the real economy and later to Meltzer’s advocacy of the Taylor Rule. Brunner and Meltzer (1964) also touched base on themes that would appear in their later work including the role of information and uncertainty and the distinction between permanent and transitory shocks. Another theme that first appears in the 1964 monograph is a critique of the concept of the liquidity trap that was at the heart of Keynesian doctrine. Brunner and Meltzer’s work on the liquidity trap appeared later in their well-known 1968 JPE article. This work fed into Brunner and Meltzer’s Mattioli Lectures (1983) and Meltzer’s (1988) book on Keynes. Brunner and Meltzer do not explicitly develop the monetary policy transmission mechanism in their 1964 monograph but the evidence that they marshall against the Fed’s policy helped their later work on the Brunner and Meltzer model in the 1970s and 1980s and later their work on the credit channel of monetary policy in the 1990s. The paper is structured as follows. Section 2 focuses on the 1964 monograph. I develop four themes: their general framework; their critique of the Free Reserves doctrine; their alternative monetary base, money multiplier approach; and their empirical and historical evidence. Section 3 highlights the main themes in Allan Meltzer’s A History of the Federal Reserve. In section 4 I 3 explore the connection between the 1964 monograph and the later Rules versus Discretion debate. Section 5 concludes with some of the lessons from Brunner and Meltzer’s treatment of theory, empirical evidence and narrative monetary history. 2. Brunner and Meltzer (1964) on Federal Reserve Monetary Policy In 1964 Karl Brunner and Allan Meltzer issued a monograph commissioned by Chairman Wright Patman of the Congress Committee on Banking and Currency. In this lengthy report the authors critically evaluated the framework and operations of the Federal Reserve System in its first fifty years of operation. The questions that the authors posed were: 1) What was the key idea in the Federal Reserve’s policy framework?; 2) How did their framework translate into policy?; 3) How did the Fed’s framework fare when tested against the experience?3 The Study was divided into 4 sections: 1. Some General Features of the Federal Reserve Approach to Policy: 2. Free Reserves; 3. The Monetary Base and Money Multiplier Approach; 4. Evidence on the Relationship between the Monetary Base and the Money Supply. 2.1 General Features of the Federal Reserve’s Approach to Monetary Policy In this section of the monograph, Brunner and Meltzer present an overview of the findings of their study. Their evaluation was based on the record available from the Federal Open Market Committee (FOMC), the staffs of the Board of Governors and the Federal Reserve Banks. It was also based on a questionnaire the authors sent to the FOMC members and Reserve bank Presidents. The authors spell out the Fed’s 4 framework, criticize it, and compare it both with data and historical experience. They then compare the Fed’s framework to their own which is based on the monetary base and the money multiplier. The key conclusion derived from this study is that the Federal Reserve did not have an effective monetary policy framework. It did not have a viable analysis linking their monetary policy actions to the money supply. Because the Fed did not have an adequate framework of how its policy affects the money supply it did not follow good monetary policy (Brunner and Meltzer 1964a page 9). Later in the monograph the authors attribute the Fed’s flawed policy framework to its adherence to various versions of one developed by W.W Rieffler in the 1920s and later extended in the 1930s and 40s by W. Randolph Burgess and Emmanuel A. Goldenweisser. The reasons given for the Fed’s failure as developed throughout the monograph are: 1. The Fed’s short-term emphasis (what Allan Meltzer later called “short termism”). 2.The Fed viewed the monetary process from the perspective of a single bank rather than the banking system as a whole. Brunner and Meltzer argued that the Fed’s concern with short-term events had driven out the long-term research needed to develop an effective framework and moreover, a key reason why the Fed mainly focused on short-term factors is because it did not have an understanding of the connection between monetary policy and the money supply or of the money supply to real income and the price level. The way the Fed operated when Brunner and Meltzer were writing was to adjust commercial banks reserve positions to affect the money market. The Fed’s short-term 5 focus was on the “feel and tone” of the market and the level of free reserves. This they argued led the FOMC to give conflicting goals to the Manager of the FOMC desk which in turn gave him considerable discretionary power. In the Fed’s view, bank reserves and the federal funds rate reacted to market forces and had a large random component. The Manager of the Desk had to separate random from systematic elements.
Load more

Recommended publications
  • Karl Brunner and UK Monetary Debate
    Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Karl Brunner and U.K. Monetary Debate Edward Nelson 2019-004 Please cite this paper as: Nelson, Edward (2019). \Karl Brunner and U.K. Monetary Debate," Finance and Economics Discussion Series 2019-004. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2019.004. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. Karl Brunner and U.K. Monetary Debate Edward Nelson* Federal Reserve Board November 19, 2018 Abstract Although he was based in the United States, leading monetarist Karl Brunner participated in debates in the United Kingdom on monetary analysis and policy from the 1960s to the 1980s. During the 1960s, his participation in the debates was limited to research papers, but in the 1970s, as monetarism attracted national attention, Brunner made contributions to U.K. media discussions. In the pre-1979 period, he was highly critical of the U.K. authorities’ nonmonetary approach to the analysis and control of inflation—an approach supported by leading U.K. Keynesians. In the early 1980s, Brunner had direct interaction with Prime Minister Margaret Thatcher on issues relating to monetary control and monetary strategy.
    [Show full text]
  • On the Classification of Economic Fluctuations
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Explorations in Economic Research, Volume 2, number 2 Volume Author/Editor: NBER Volume Publisher: NBER Volume URL: http://www.nber.org/books/moor75-2 Publication Date: 1975 Chapter Title: On the Classification of Economic Fluctuations Chapter Author: John R. Meyer, Daniel H. Weinberg Chapter URL: http://www.nber.org/chapters/c7408 Chapter pages in book: (p. 43 - 78) Moo5 2 'fl the 'if at fir JOHN R. MEYER National Bureau of Economic on, Research and Harvard (Jriiversity drawfi 'Ces DANIEL H. WEINBERG National Bureau of Economic iliOns Research and'ale University 'Clical Ihit onth Economic orith On the Classification of 1975 0 Fluctuations and ABSTRACT:Attempts to classify economic fluctuations havehistori- cally focused mainly on the identification of turning points,that is, so-called peaks and troughs. In this paper we report on anexperimen- tal use of multivariate discriminant analysis to determine afour-phase classification of the business cycle, using quarterly andmonthly U.S. economic data for 1947-1973. Specifically, weattempted to discrimi- nate between phases of (1) recession, (2) recovery, (3)demand-pull, and (4) stagflation. Using these techniques, we wereable to identify two complete four-phase cycles in the p'stwarperiod: 1949 through 1953 and 1960 through 1969. ¶ As a furher test,extrapolations were made to periods occurring before February 1947 andalter September 1973. Using annual data for the period 1926 -1951, a"backcasting" to the prewar U.S. economy suggests that the n.ajordifference between prewar and postwar business cycles isthe onii:sion of the stagflation phase in the former.
    [Show full text]
  • Overcoming the Zero Bound with Negative Interest Rate Policy
    OVERCOMING THE ZERO BOUND WITH NEGATIVE INTEREST RATE POLICY Marvin Goodfriend Carnegie Mellon University, Tepper School “Removing the Zero Lower Bound on Interest Rates” An Imperial College Business School, Brevan Howard Centre for Financial Analysis, CEPR, and Swiss National Bank Event London, 18 May 2015 1 Overcoming the Zero Bound with Negative Interest Rate Policy • Urgency of the problem • Evolution of monetary policy • Why the zero bound constraint matters • Mechanics of negative nominal interest rate policy • Elevated inflation target not the answer • Conclusion 2 Urgency of the Problem • Irving Fisher’s (1930, 1986) The Theory of Interest pointed out that if a commodity could be stored costlessly over time, then the rate of interest in units of that commodity could never fall below zero • A central bank that pays zero interest on reserves puts a lower bound on the nominal interbank rate of interest • The power of open market operations to lower short-term real interest rates to fight deflation or recession then is limited when nominal rates are already low on average—as is the case when inflation and the inflation premium are stabilized at a 2% inflation target 3 Urgency of the Problem (2) • Quantitative monetary policy appears to have been effective in averting deflation and stimulating demand with near zero interest rates in the US and the UK • But Japan did not exit the zero bound or deflation for two decades even with the help of quantitative policy • The US, the UK, and the Euro area have not yet exited near zero interest
    [Show full text]
  • Chapter 11 - Fiscal Policy
    MACROECONOMICS EXAM REVIEW CHAPTERS 11 THROUGH 16 AND 18 Key Terms and Concepts to Know CHAPTER 11 - FISCAL POLICY I. Theory of Fiscal Policy Fiscal Policy is the use of government purchases, transfer payments, taxes, and borrowing to affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. A. Fiscal Policy Tools • Automatic stabilizers: Federal budget revenue and spending programs that automatically adjust with the ups and downs of the economy to stabilize disposable income. • Discretionary fiscal policy: Deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price stability, and economic growth. • Changes in Government Purchases: At any given price level, an increase in government purchases or transfer payments increases real GDP demanded. For a given price level, assuming only consumption varies with income: o Change in real GDP = change in government spending × 1 / (1 −MPC) other things constant. o Simple Spending Multiplier = 1 / (1 − MPC) • Changes in Net Taxes: A decrease (increase) in net taxes increases (decreases) disposable income at each level of real GDP, so consumption increases (decreases). The change in real GDP demanded is equal to the resulting shift of the aggregate expenditure line times the simple spending multiplier. o Change in real GDP = (−MPC × change in NT) × 1 / (1−MPC) or simplified, o Change in real GDP = change in NT × −MPC/(1−MPC) o Simple tax multiplier = −MPC / (1−MPC) B. Discretionary Fiscal Policy to Close a Recessionary Gap Expansionary fiscal policy, such as an increase in government purchases, a decrease in net taxes, or a combination of the two: • Could sufficiently increase aggregate demand to return the economy to its potential output.
    [Show full text]
  • Investment Insights
    CHIEF INVESTMENT OFFICE Investment Insights AUGUST 2017 Matthew Diczok A Focus on the Fed Head of Fixed Income Strategy An Overview of the Federal Reserve System and a Look at Potential Personnel Changes SUMMARY After years of accommodative policy, the Federal Reserve (Fed) is on its path to policy normalization. The Fed forecasts another rate hike in late 2017, and three hikes in each of the next two years. The Fed also plans to taper reinvestments of Treasurys and mortgage-backed securities, gradually reducing its balance sheet. The market thinks differently. Emboldened by inflation persistently below target, it expects the Fed to move significantly more slowly, with only one to three rate hikes between now and early 2019. One way or another, this discrepancy will be reconciled, with important implications for asset prices and yields. Against this backdrop, changes in personnel at the Fed are very important, and have been underappreciated by markets. The Fed has three open board seats, and the Chair and Vice Chair are both up for reappointment in 2018. If the administration appoints a Fed Chair and Vice Chair who are not currently governors, then there will be five new, permanent voting members who determine rate moves—almost half of the 12-member committee. This would be unprecedented in the modern era. Similar to its potential influence on the Supreme Court, this administration has the ability to set the tone of monetary policy for many years into the future. Most rumored candidates share philosophical leanings at odds with the current board; they are generally hawkish relative to current policy, favor rules-based decision-making over discretionary, and are unconvinced that successive rounds of quantitative easing were beneficial.
    [Show full text]
  • Deirdre Mccloskey Bio Ziliak Chicago Econ 2010
    25 Deirdre N. McCloskey Stephen T. Ziliak ‘I try to show that you don’t have to be a barbarian to be a Chicago School economist.’ That, in her own words, is Deirdre McCloskey’s main – though she thinks ‘failed’ – con- tribution to Chicago School economics (McCloskey 2002). Donald Nansen McCloskey (1942–) was born in Ann Arbor, Michigan and raised in Cambridge, Massachusetts. Donald changed gender in 1995, from male to female, becoming Deirdre (McCloskey 1999). She is the oldest of three children born to Helen Stueland McCloskey and the late Robert G. McCloskey. Her father, whose life was cut short by a heart attack, was in Deirdre’s youth a tenured professor of government at Harvard University. He was fl uent in the humanities as much as in law and social science; Joseph Schumpeter and the writer W.H. Auden were his personal friends and coff ee break mates. Helen’s passion was in poetry and opera. She did not deny the chil- dren the values and joys of intellectual and artistic life pursuits – ’burn always with a gem- like fl ame’, she told Deirdre and the others. (Books were all over the McCloskey household: each child was supplied with a personal library.) Cambridge and family con- spired to make Deirdre into a professor by, Deirdre fi gures, ‘about age fi ve’ (McCloskey 2002). She read widely, but especially in history and literature. Yet like most professors, she stumbled in her early years. At age 10, for example, she understood that her father was the author of a fi ne new book but she was not sure if his book was Make Way for Ducklings or Blueberries for Sal; actually, the book was American Conservatism in the Age of Enterprise, by the other Robert McCloskey (1951).
    [Show full text]
  • Some Political Economy of Monetary Rules
    SUBSCRIBE NOW AND RECEIVE CRISIS AND LEVIATHAN* FREE! “The Independent Review does not accept “The Independent Review is pronouncements of government officials nor the excellent.” conventional wisdom at face value.” —GARY BECKER, Noble Laureate —JOHN R. MACARTHUR, Publisher, Harper’s in Economic Sciences Subscribe to The Independent Review and receive a free book of your choice* such as the 25th Anniversary Edition of Crisis and Leviathan: Critical Episodes in the Growth of American Government, by Founding Editor Robert Higgs. This quarterly journal, guided by co-editors Christopher J. Coyne, and Michael C. Munger, and Robert M. Whaples offers leading-edge insights on today’s most critical issues in economics, healthcare, education, law, history, political science, philosophy, and sociology. Thought-provoking and educational, The Independent Review is blazing the way toward informed debate! Student? Educator? Journalist? Business or civic leader? Engaged citizen? This journal is for YOU! *Order today for more FREE book options Perfect for students or anyone on the go! The Independent Review is available on mobile devices or tablets: iOS devices, Amazon Kindle Fire, or Android through Magzter. INDEPENDENT INSTITUTE, 100 SWAN WAY, OAKLAND, CA 94621 • 800-927-8733 • [email protected] PROMO CODE IRA1703 Some Political Economy of Monetary Rules F ALEXANDER WILLIAM SALTER n this paper, I evaluate the efficacy of various rules for monetary policy from the perspective of political economy. I present several rules that are popular in I current debates over monetary policy as well as some that are more radical and hence less frequently discussed. I also discuss whether a given rule may have helped to contain the negative effects of the recent financial crisis.
    [Show full text]
  • How the World Achieved Partial Consensus on Monetary Policy1
    How the World Achieved Partial Consensus on Monetary Policy1 James Bullard President and CEO, Federal Reserve Bank of St. Louis Shadow Open Market Committee Meeting Current Monetary Policy: The Influence of Marvin Goodfriend New York, N.Y. March 6, 2020 In 2007, Marvin Goodfriend published a paper titled “How the World Achieved Consensus on Monetary Policy” in the Journal of Economic Perspectives. It is an excellent summary of the sequence of economic ideas influencing and eventually dominating actual monetary policy from Lucas (1972) up to the eve of the global financial crisis. Goodfriend’s explanations and summaries are so lucid, and his examples and thinking so familiar to me that in rereading the article I had the sensation that my life was flashing before my eyes. In the article, Goodfriend builds up the key idea in central banking of the last 50 years—namely, successful monetary policy requires a credible commitment on the part of the central bank to careful, systematic future policy choices. At the end of the article, he allows for some unfinished business and some open issues, among them the question of why credible central banks may end up with inflation that is too low when compared to an intended target. In retrospect, the “World Consensus” article appears a bit triumphal and somewhat premature. The events since its publication seem to suggest that the consensus that appeared to exist at that moment has its own problems. As we meet here today, many central banks have consistently missed their stated inflation targets to the low side for many years.
    [Show full text]
  • Information to Users
    INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, som e thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand corner and continuing from left to right in equal sections with small overlaps. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6” x 9” black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. ProQuest Information and Learning 300 North Zeeb Road, Ann Arbor, Ml 48106-1346 USA 800-521-0600 ____ ® UMI BEFORE THE GREAT SOCIETY: LIBERALISM, DEINDUSTRIALIZATION AND AREA REDEVELOPMENT IN THE UNITED STATES, 1933 - 1965 DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Gregory S. Wilson, M.A. ***** The Ohio State University 2001 Dissertation Committee: Approved by Professor William R.
    [Show full text]
  • Perspectives on Monetary and Credit Policy
    Perspectives on Monetary and Credit Policy November 20, 2012 Jeffrey M. Lacker President Federal Reserve Bank of Richmond Shadow Open Market Committee Symposium New York, N.Y. The Federal Open Market Committee in January formally announced a numerical objective for inflation, a step which has long been argued to be essential to anchoring longer-term expectations about the conduct of monetary policy.1 So it might seem a bit surprising, as this year draws to a close, to find a member of the Committee speaking at an event whose title is “The Fed’s Monetary Policy Adrift.” But on further reflection, I don’t think it should be surprising at all. Both the FOMC’s articulation of an inflation target and the sense that policy is adrift are related, I believe, to the extraordinary circumstances and resulting policy actions of the last few years. In my remarks this morning, I will discuss two dimensions of Federal Reserve policy that came in the wake of the financial crisis and Great Recession: first, the effort to provide stimulus and policy guidance at the zero bound; and second, the expansion of the scope of Fed policy beyond monetary policy to a broader engagement in credit policy. Before I begin, however, I need to recite a disclaimer that should be quite familiar to members of the Shadow Open Market Committee — my remarks reflect my own views and not necessarily those of any 2 other members of the FOMC. Maintaining Credibility Let me begin by noting that when the FOMC announced an explicit numerical objective for inflation this year, we had experienced an extended period of relative monetary stability.
    [Show full text]
  • Down Market Battle Plan
    The Shape of Recovery: What’s Next? Panelists Leon LaBrecque Matt Pullar JD, CPA, CFP®, CFA Vice President, Private Client Chief Growth Officer Services 248.918.5905 216.774.1192 [email protected] [email protected] 2 As an independent financial services firm, our About Sequoia salaried, non-commission professionals have Financial Group access to a variety of solutions and resources and our recommendations are based solely on what works best for you, not us. 3 1. What are we monitoring? 2. What are we hearing from our Financial investment partners? Market Update 3. What are we recommending? 4 COVID-19: U.S. Confirmed Cases and Fatalities S o urce: Johns Hopkins CSSE, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of June 30, 2020. 5 Consumer Sentiment Index S o urce: CONSSENT Index (University of Michigan Consumer Sentiment Index) Copyright 2020 Bloomberg Finance L.P. 17-Jul-2020 6 COVID-19: Fatalities S o urce – New York Times https://static01.nyt.com/images/2020/0 7/20/multimedia/20-MORNING- 7DAYDEATHS/20-MORNING- 7DAYDEATHS-articleLarge.png 7 High-Frequency Economic Activity S o urce: Apple Inc., FlightRadar24, Mortgage Bankers Association (MBA), OpenTable, STR, Transportation Security Administration (TSA), J.P. Morgan Asset Management. *Driving directions and total global flights are 7- day moving averages and are compared to a pre-pandemic baseline. Guide to the Markets – U.S. Data are as of June 30, 2020. 8 S&P 500 Index at Inflection Points S o urce: Compustat, FactSet, Federal Reserve, Standard & Poor’s, J.P.
    [Show full text]
  • Interest on Reserves and Monetary Policy
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics Marvin Goodfriend Interest on Reserves and Monetary Policy I. Introduction the world’s major central banks implement monetary policy by manipulating short-term interest rates. Yet important onetary policy operating procedures have long been differences remain in the procedures by which short-term rates M debated within the Federal Reserve and among are managed. There is considerable interest in comparing monetary economists at large. For instance, economists have alternatives currently in use and in exploring new procedures disagreed about whether a central bank should utilize bank that might afford benefits in the future.3 reserves or the interest rate as the policy instrument. For the Motivated by these four developments, this paper highlights time being at least, the Fed has settled on an interest rate policy the role of interest on reserves in understanding the leverage instrument and has announced its current federal funds rate that central banks exert over interest rates and explores the target since 1994. The focus on interest rate policy is reflected potential for interest on reserves to improve the in the ubiquitous use of the Taylor rule in monetary policy implementation of monetary policy. I find that interest on analysis. reserves can and should be employed as a policy instrument Oddly enough, just as the longstanding debate over bank equal in importance with open market operations. In effect, my reserves and the federal funds rate was set aside, four paper resolves the historical dispute over bank reserves and developments combined to renew an interest in operating interest rate operating procedures by pointing out how a procedures.
    [Show full text]